Europe’s Jobless Recovery?

News in today might suggest that far from obsessing ourselves with the current plight of the US economy, our attention might be better directed rather nearer home. Reading off from the results of the latest Purchasing Managers Index survey which appears in todays Financial Times, the services sector is growing, but employemnt in it isn’t. Sound familiar? Now we’d better sit down and start examining the possible causes. Of course, it might be just a temporary blip (this is what they keep saying in the US, but it’s a blip that has been running some months now) and then again it might not be.

The eurozone’s dominant services sector expanded for the seventh month running in January but companies continued to shed staff, according to a leading survey of more than 2,000 companies.

The Reuters/NTC survey showed the purchasing managers’ index for the services sector rising to 57.3 from 56.6 in December. A reading above 50 shows the service sector is expanding.

But the survey, which is watched closely by the European Central Bank, showed that companies were still reluctant to hire staff despite their growing optimism about the economic outlook.

The business expectations component of the index rose to a 22 month high of 71.5 from 71.0 while new business edged up to 57.0 form 56.9. But staffing levels fell, with the employment index sliding to 48.7 from 49.6.

Robert Prior Wandesford of HSBC said the rise in the PMI would normally be consistent with 0.9 per cent quarter on quarter services sector growth but that did not fit with the weakness of consumer spending.

Economists noted that the survey suggested that the upturn in the eurozone’s services sector had so far been a jobless recovery and had therefore had little impact on consumer confidence.

Employment is expected to only slowly respond to the upswing because the European corporate sector was much later than its counterparts in the US and UK in adjusting to the downturn.

In addition the strong euro, which has risen 20 per cent against the dollar over the last year, has weakened companies’ pricing power and squeezed margins intensifying pressure onthemto cut costs by shedding jobs.

The rise in the PMI was led by France where businesses reported a big jump in optimism. But in Germany the gains were modest and in Italy, the euro-zone’s third biggest economy, growth slowed.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

7 thoughts on “Europe’s Jobless Recovery?

  1. hmmm,
    the Financial Times link had this snippet:

    James Carrick of ABN Amro said the contraction in employment suggested that domestic demand would “remain subdued” as consumers stepped up their savings in the face of economic uncertainty.

    If that’s the case, then the E.U would be in a more traditional recession; the savings accumulated during the downturn eventually driving the recovery if the pattern holds true to form.

  2. “eventually driving the recovery if the pattern holds true to form.”

    The point is Patrick, this is supposed to be the recovery. Remember all the fuss about allowing the deficits to stimulate growth. So now we seem to be getting what little growth we can aspire to. After this ‘recovery’, what we could expect is another downturn at some point – but then with ‘recoveries’ like this, who needs downturns. But still, it is early days yet. Let’s see the next few months data.

    And my central point would be: there is now no pattern to hold true to form . No road maps. We are driving blind.

  3. After this ‘recovery’, what we could expect is another downturn at some point

    That’s why it’s called cyclical.

    And my central point would be: there is now no pattern to hold true to form . No road maps. We are driving blind.

    Maybe, though I’m skeptical things are quite that dire just yet.

    Unfortunately, I can’t say the same for the U.S. which seems to be following the example of Charles V (Carlos I) who embezzled Spain to fund his foreign follies.

  4. “Unfortunately, I can’t say the same for the U.S. which seems to be following the example of Charles V (Carlos I) who embezzled Spain to fund his foreign follies.”

    I don’t think that word means what you think it means. :^)

    In any case, though, it looks to me as though Europe has a great deal more to worry about concerning the U.S. trade and budget deficits than the U.S. does.

    The traditional concern is, of course, that the gaps are usually financed by foreign capital inflows, and that given low U.S. rates such inflows will become unattractive. So far, so good. This is supposed to lead to a drop in the dollar, as without the inflows only a shift in relative prices will serve to cover the gap. Again, so far so good. It seems to fit the fact-pattern. The falling dollar is then supposed to lead to rising inflation in the U.S., as badly needed imports get priced upwards. Whoops. Houston, we have a problem. No inflation in sight.

    The answer is the rapid growth in productivity last year and the resulting “jobless” recovery. If import prices rise, there’s plenty of existing and potential slack to boost domestic production without any real inflation to speak of. Foreign exporters have no pricing-power worth mentioning, and have no choice but to either suck up cuts in margins or lose market-share to domestic U.S. manufacturers. And if you believe that 90s IT spending created a deflationary bias that will take a good long while to work its way through the system, this state of affairs will not change any time soon. New demand will certainly be created as jobs _shift_, but the deflationary bias in manufacturing will remain.

    Europe, in other words, has no choice but to start loosening the taps and boosting domestic demand. There will be no export-driven recovery, and relying on a specious moral superiority that pretends that the U.S. is living “beyond its means” will result in nothing but disappointment. The dollar will drop and Europe will slow. Learn the lesson of Marriner Eccles, folks. Finance, trade and capital flows have precious little to do with moralism.

    Bernard Guerrero

  5. . The falling dollar is then supposed to lead to rising inflation in the U.S., as badly needed imports get priced upwards. Whoops. Houston, we have a problem. No inflation in sight.

    well, not yet…
    Unless you ignore that mountain of debt that the Bush administration is piling up (while simultaneously underminning the government’s ability to pay for its debts).

    Keep in mind our entire financial system is built around the premise that T-bills are the SAFEST investment because they are backed by the american people’s tax dollars…

  6. Patrick,

    “Unless you ignore that mountain of debt that the Bush administration is piling up (while simultaneously undermining the government’s ability to pay for its debts).”

    But it’s not inflation. As long as debt service remains a reasonable portion of revenue and the debt remains a reasonable portion of GDP, no big deal. I’ll worry precisely when it starts to translate into too much money (that is, claims on resources) chasing too few actual resources. e.g. inflation. Try _A Free Nation Deep In Debt_. Great book, ex-City banker.

    “Keep in mind our entire financial system is built around the premise that T-bills are the SAFEST investment because they are backed by the american people’s tax dollars…”

    And when precisely do you see a default coming down the pike? You could keep up the current pace for years and still not run up a debt that’s anywhere near the government’s carrying capacity at current rates, and current rates won’t budge unless the bond markets see signs of, you guessed it, inflation. And with a deflationary bias built into the current economy, I don’t see any sign of that. Worst that can happen is an Asian sell-off of Treasuries because yields get too low, but in the current environment it would actually just be a spike in rates swimming against a tide of deflationary pressure.

    A final note. You mention “that mountain of debt that the Bush administration is piling up “. Let’s get real. Revenue was inflated in the late 90s, and even with the budgeted increase in military spending discretionary spending is still chicken feed. That mountain of debt may well become unmanageable, but it will be due to one thing and one thing only: middle-class fiscal transfer programs. Europe take note…

    Bernard

  7. “Unless you ignore that mountain of debt that the Bush administration is piling up (while simultaneously undermining the government’s ability to pay for its debts).”

    But it’s not inflation

    …Yet.

    As long as debt service remains a reasonable portion of revenue and the debt remains a reasonable portion of GDP, no big deal.

    Maybe, but where do you draw the line?
    More to the point, can the bond market provide the money the government needs to borrow to function ? I think domestic lenders are tapped out, and international lenders can’t/won’t subsidize the U.S. Government forever.

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